Public Markets Create Opportunities

Mohnish Pabrai explains how public markets create more opportunities for value investing compared to private markets due to their auction-driven nature and daily price fluctuations.

Key Points:

• Public vs Private Market Pricing

  • Public companies have dramatic daily price swings
  • Average public company's 52-week range might be 70 to 140 (50% swing)
  • Private assets like homes only change 3-4% annually
  • Private markets have intelligent buyers facing intelligent sellers, leading to more rational pricing

• Why Public Markets Create Opportunities

  • Auction-driven markets lead to pricing anomalies
  • You can buy partial shares at prices far below what someone would pay for the whole company
  • Example: IPSCO steel company shares available at 3x earnings, but later acquired by Swedish company at 4x that price

• Finding Value in Public Markets

  • Look for hated and unloved sectors
  • Focus on areas with institutional constraints (like endowments not allowed to invest in certain sectors)
  • Example: Coal industry in 2023 - businesses producing $1B annual cash flow available for under $2B market cap
  • Patience is key - making 2 good investments per year is sufficient

• Investment Philosophy

  • Don't need constant activity
  • Wait for situations where mispricing occurs due to unusual circumstances
  • Look for businesses that are fundamentally sound but temporarily out of favor
  • Focus on areas where institutional constraints create artificial selling pressure

The key advantage of public markets is the disconnect between daily trading prices and underlying business value, creating opportunities for patient investors willing to look in unloved areas.